Thursday, September 29, 2011
6:53:17 PM EDT

Economic Numbers, Europe Help For A Change

by
Todd Shriber

In an odd, but pleasant turn of events, some good economic news here in the U.S. and more encouraging signs out of Europe helped ignite a rally in stocks as the S&P 500 gained nearly 1% and the Dow Jones Industrial Average notched a triple-digit gain. Politicians in Germany voted to expand a bailout fund and that was definitely one of the day's catalysts.

Market Stats

On the jobs front, finally some good news. The Labor Department said today that 391,000 Americans filed for jobless benefits last week, down from the revised 428,000 claims in the previous week. That is good for the first reading below 400,000 since August and the lowest reading since April.

Words of caution: The Labor Department said the big decline may be attributable to season factors and six million Americans have been out of work for six months or longer, according to the Wall Street Journal. Last week's claims number also soundly beat the reading of 420,000 claims economists expected. The four-week moving average fell to 417,000 from 422,250.

Jobless Claims

There was also surprising news on the GDP front and I mean surprising in a good way. The Commerce Department's latest estimate of second-quarter GDP growth checked in at 1.3%, topping the previous estimate of 1%. Economists expected a final second-quarter reading of 1.1%. Most economists have said the economy picked up some steam in the current quarter, which ends Friday, but the growth rates are far from robust. Most third-quarter GDP estimates hover in the 2%-2.5% range. Consumer spending grew 0.7% in the quarter, but that is still the smallest increase since the fourth quarter of 2009.

After-tax corporate profits rose at a 4.3% rate in the second quarter, the largest increase in a year, instead of 4.1%, according to the New York Times.

GDP Chart

Keeping with the theme of positive economic news, the Kansas City Fed's manufacturing composite index rose to six in September from an August reading of three. The Kansas City region was the last and best of the September regional Fed updates. The other four regions â€“ New York, Philadelphia, Dallas and Richmond â€“ all showed contraction last month. In the Kansas City region, the new orders index surged to five in September from one in August.

States included in the Kansas City Fed region are Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and western Missouri.

Kansas City Fed Chart

Economic Calendar

You may have noticed in the stats table that the Nasdaq Composite and Nasdaq 100 were in the red and it is easy to explain why. Start with one stock that can certainly be considered a fallen star that at this point, no one knows when it will shine again. I am talking about Netflix. The movie rental company plunged another 11% today on volume that was more than triple the daily average after Microsoft (MSFT) rolled out a service that rivals what Netflix has to offer.

Microsoft plans to leverage its Xbox Live platform to feature online paid TV services from Comcast (CMCSA) and Verizon (VZ). Video game consoles such as Xbox are the most popular avenue for accessing Netflix streaming content, Bloomberg reported. Translation: If you own an Xbox, you suddenly do not need Netflix anymore.

A survey by Knowledge Networks found 10% of Netflix customers said they would be ''very likely'' to cancel if their cable or satellite TV provider offered a similarly priced, comparable service, Bloomberg reported. Add to that Amazon's (AMZN) Kindle Fire tablet introduced yesterday appears to be one more way Amazon is looking to compete with Netflix and there is a recipe for disaster for Netflix shares.

Bottom line: Netflix was over $300 in July. There is little reason to believe it will be a triple-digit stock for much longer. If companies with far more cash such as Amazon and Microsoft decide they want to bury Netflix, they can and will. I have no skin in the Netflix game, long or short, but I think it is pretty obvious what the path of least resistance is here.

Netflix Chart

Speaking of tech names that have seen better days, Research In Motion (RIMM) got knocked around again today after Collins Stewart published an analyst note suggesting RIM was throwing in the towel on the PlayBook tablet. RIM denied that claim and said it remains committed to the PlayBook.

I think the Wall Street Journal sums it best when asking ''but is the tablet market committed to it?'' It being the PlayBook. The answer is probably ''no.'' PC World reports Best Buy has slashed prices on the PlayBook by $200. Even with that, the RIM offering is $299 compared to $199 for the new Amazon tablet.

The reality of the tablet market is this: Apple's (AAPL) iPad is viewed as the best product and one that consumers have been willing to pay up for. That means the only way a competing product can really compete is to offer a product that is almost as good at far lower price points. Amazon gets this and can afford to sacrifice profit margins for revenue growth. After so many quarters of disappointing investors, RIM does not have the luxury of putting profits on the back burner just to sell more tablets.

The tablet race has two horses right now: Apple and Amazon.

RIM Chart

It was a terrible day for an array of Chinese internet stocks, even the crown jewel of the group, Baidu (BIDU) after the SEC confirmed the Justice Department is looking into accounting irregularities at some U.S.-listed Chinese companies. Common sense tells us the combination of two government agencies and the phrase ''accounting irregularities'' in the same sentence is never a good thing.

The selling pressure was so intense in Baidu and some others that the SEC has implemented a temporary short-selling ban on some of the Chinese Internet names. Regulators are really zeroing on the use of reverse mergers and shell companies by some of the more dubious Chinese firms listed here in the U.S., but the baby often gets thrown out with the bathwater.

That explains Baidu falling 9.2% on volume that was about 2.5% times the daily average. SOHU was off almost 5% on roughly triple the usual turnover and SINA plunged 10% on volume that was also about 2.5 times the daily average. Somehow the Guggenheim China Technology ETF (CQQQ), of which BIDU, SINA and SOHU account for 28% of, was only down 1.9%.

Chinese Internet ETF Chart

Looking at the charts, an up day is better than a down day, but the S&P 500 did not do enough to address resistance just over 1200. The dip to 1139 was bought (support is in the 1135 area), but index really needs to make a run to the 1195-1205 to get buyers excited. As Keene noted last night, bearish below 1130 is probably the way to look at things. From there, things get progressively more ugly as 1100 then 1060 would come into play.

S&P 500 Chart

The Dow's final tally looks good on paper, but the blue-chip index fell short of taking out its 50-day moving average at 11,429 or taking out stiffer resistance just a few points from there. The price action here still is not much to write home about and the Dow remains vulnerable. That said, another 200 points on top of Thursday's close, and the near-term setup for the Dow would be a bit more attractive. Problem is support is not too far away at 10,930.

Dow Chart

I am willing to give the Nasdaq a pass for today, sort of, because most of the decline can probably be tied to NFLX, RIMM and the government looking into the aforementioned Chinese tech stocks. Eliminate just one or two of those factors and there is a fair chance the Nasdaq Composite takes out its 50-day line 2557. The flip side is the close below 2500 could be a bearish sign and the Composite could easily return to 2460 from here and perhaps as low as 2400.

Nasdaq Chart

I am not backing down from my conviction that this market is beholden to two catalysts: Europe and U.S. economic data. For one day at least, both of those situations looked pretty good. I am not a believe in the positive sentiment on Europe lasting too long, but I will be flat heading into the weekend because that is the prudent thing to do. Have a great weekend.